November 29, 1999
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: Proposed Rules on Audit Committee Disclosure
File No. S7-22-99
Dear Mr. Katz:
Exxon Corporation, a company subject to the disclosure requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), wishes to make the
comments contained in this letter on the rule proposals contained in Release No.
34-41987 (the "Release").
Regulation S-K, Item 306(a)(1) as proposed would require a statement by
the audit committee as to whether it has reviewed and discussed the audited
financial statements with management. It has long been our practice to have
financial management and the independent auditor review and discuss Exxon's
audited financial statements with the entire board. We believe that it is
appropriate to provide every director the opportunity to participate in such
discussions. As a result, we do not repeat that discussion in an audit
committee meeting. We should note that Exxon's audit committee meets several
times a year. At each meeting the committee is given the opportunity to discuss
any matters it desires with financial management and the independent auditor
(together, and each separately as a routine procedure). As presently drafted,
clause (a)(1) would appear to require a negative response in our audit
committee's report along with the foregoing explanation or, to avoid that, an i!
nefficient repeat of the board m
eeting discussion. Therefore, we recommend that clause (a)(1) be revised to
require a statement as to whether the audit committee or the full board of
directors has reviewed and discussed the audited financial statements with
management.
Regulation S-K, Item 306(a)(4) as proposed would require proxy
statements to include an audit committee report stating whether anything has
come to the attention of the audit committee members that caused the committee
to believe that the audited financial statements included in the company's Form
10-K for the most recently completed fiscal year contain an untrue statement of
a material fact or contain a material omission. We believe the requirement to
refer to the Form 10-K can cause an unnecessary process problem. In a typical
corporate disclosure schedule, the proxy statement for the company's annual
meeting must go to the printer before the Form 10-K for the most recent fiscal
year has been filed. As a result the members of the audit committee would be
required to make their report in an SEC filed document before the Form 10-K is
filed. The clear implication is that they had seen the Form 10-K as filed. In
fact, that will not have been possible. We believe this prob!
lem can be avoided without detra
cting from the proposal's purpose. In the typical schedule for corporate
disclosure documents, the text of the annual report to shareholders (including
the report of the independent auditor) would be available to the members of the
audit committee by the time the proxy statement containing the audit committee
report must be printed. We, therefore, recommend that the requirement in clause
(a)(4) of Item 306 be revised to replace the reference to the company's annual
report on Form 10-K with a reference to the company's annual report to
shareholders required by Rule 14a-3(b).
Regulation S-K, Item 306(c) as proposed provides that the audit
committee report would not be deemed to be "soliciting material" or to be
"filed" with the Commission or subject to Regulation 14A or 14C or subject to
liability under Section 18 of the Exchange Act (with exceptions not relevant for
this discussion). Part III.E of the Release notes that the Commission intends
to follow the Blue Ribbon Committee's recommendation to adopt liability "safe
harbors" to cover the new disclosures. It further notes that the new safe
harbors track the treatment of the compensation committee report under
Regulation S-K, Item 402. We believe that the comparison to the safe harbor
provided for the compensation committee is inappropriate and that the proposed
"safe harbor" provides no safe harbor at all.
The compensation committee report may be a report from another board committee.
However, it is a very different matter so long as the audit committee must make
its material misstatements and omissions response. The compensation committee
is simply stating its own reasons for the action it took. Each member should be
able to read the report and easily conclude whether or not the report reflects
what they thought. The potential for liability should be rather limited.
The audit committee, on the other hand, must almost totally rely on
discussions and documents from a variety of third parties in order to certify
that it is not aware of any material misstatements and omissions. It is
significantly more exposed to liability. We recognize that the members of the
committee are only addressing whether any matters have come to their attention.
However, we are confident that the Commission recognizes that the litigation
will concern whether they have been reckless in failing to do enough to uncover
material misstatements and omissions. The language required by clause (a)(4)
looks like a combination of the language used by accountants in comfort letters
and lawyers in Rule 10b-5 opinions. Much litigation has flowed from such
statements.
Both the Report and Recommendations of the Blue Ribbon Committee on
Improving the Effectiveness of Corporate Audit Committees and the Release
propose a safe harbor. We think it is disingenuous at best for the Commission,
which demands such a high standard of disclosure from reporting companies, to
suggest that the proposal offers a safe harbor. Providing that the audit
committee report is neither soliciting material, nor filed, nor subject to
Regulations 14A or 14C or Section 18 of the Exchange Act leaves the Release with
a material omission of the real liability exposure under Rule 10b-5 and state
corporate law. If the Commission is not going to provide a safe harbor from
those real liabilities, it should at least disclose that material fact. If the
Commission really does want to provide a safe harbor, it can at least address
the Rule 10b-5 concern. It is clear from prior court cases that the
availability of a right of action for private plaintiffs can be denied where o!
n the same set of facts the Comm
ission can have the right to an enforcement action. We believe that most
issuers are far more concerned about creating another claim for class action
lawyers and significantly less concerned about a potential abuse of power by the
Enforcement Division. The Commission clearly has the rule making and exemptive
authority to set forth that distinction. We recommend that it do so.
In any event, the audit committee will still be left with a corporate
law liability for which the Commission can do nothing more than disclose its
existence. Members of audit committees will be exposed both to a corporate law
claim of breach of fiduciary duty for not having done enough (with hindsight)
before stating that they were aware of no material misstatement or omission.
Furthermore, many of them will be directly exposed to the Delaware decisions
establishing liability for misleading disclosure (whether or not action is being
requested based on such disclosure). Audit committee members of corporations
incorporated in other states will, as is always the case, be exposed to
liability since most other state courts cite Delaware law for issues not
previously decided in their own state.
Part III.E. of the Release starts by stating that the Commission does
not intend to increase director liability under Federal securities law or state
corporate law. As indicated above the Commission either cannot or will not
prevent increased liability. Therefore, we ultimately conclude that the best
solution is for the Commission to recognize the liabilities it is creating and
delete the requirement for the report. At the very least, the Commission should
delete clause (a)(4) of Regulation S-K, Item 306 and its requirement that the
audit committee address material misstatements and omissions.
The Release similarly describes proposed Schedule 14A, Item 7(e)(3) as
creating a safe harbor from liability. For all the reasons described above with
regard to Regulation S-K, Item 306(c), it offers no safe harbor. It should at
least be revised to exclude Rule 10b-5 liability to private plaintiffs.
Schedule 14A, Item 7(e)(3)(iii) as proposed would require the inclusion
of the committee charter in the proxy statement every three years. We believe
there is a better way to provide the language of the charter. The proposal,
which originated with the Blue Ribbon Committee, appears to recognize the need
for some compromise between unnecessary annual disclosure of the document and
the desire to make it publicly available. We recommend that instead of the
current proposal the audit committee charter be one of those items which is
required to be filed as an exhibit to the company's Form 10-K each year. It
would be an actual filing if there has been a change. If unchanged, it would be
incorporated by reference to the last time the charter was filed. While each
shareholder is already entitled to request a copy of any exhibit to the Form
10-K, that could be a required statement in the proxy statement. The statement
could further provide that this particular exhibit was avai!
lable free of charge. We believ
e our suggestion provides a better balance. The charter that is publicly
available will never be more than a year old. Companies and their shareholders
will not be unnecessarily burdened with additional proxy material. The
important issue is that the charter is available to those who are interested.
The undersigned will be happy to discuss any of the foregoing issues
with the staff of the
Commission if they so desire.
Very truly yours,
/s/ D. D. HUMPHREYS
Donald D. Humphreys
Vice President &
Controller
/s/ T. P. TOWNSEND
T. Peter Townsend
Vice President &
Secretary
/s/ RICHARD E. GUTMAN
Richard E. Gutman
Assistant General
Counsel